There have been free zones in Egypt and Jordan since 1975. Oman, Syria and Yemen have also started zones with varying degrees of success since 1990. But the main successes have been in the United Arab Emirates (UAE), beginning in Dubai in about 1985. Fifteen countries in the Middle East region have some kind of free zone to attract FDI. The UAE has 11 zones and Egypt 10. Turkey has 20 and Iran six.

The emirates have the common problem that their oil will soon run out and they needed to diversify. But they have little available labour and in the past have had to import it, mainly from Asia. In 1975, they also lacked infrastructure, except for the basics of a small seaport and airport.

Choosing export processing zones (EPZs) for rapid development, their main advantages were the availability of capital to build industrial estates and service buildings, and acquire new technologies, especially telecommunications. They were able to send key technicians abroad to acquire modern IT know-how and the machines necessary. Oil revenue also financed the aggressive promotion of the emirates’ first free zone to potential FDI investors. These advantages were not available to most other countries in the region at the time.

Dubai made rapid progress, due largely to skilled and dynamic management. It is the principal trendsetter in the region. To organise, finance, construct and promote a free zone to attract foreign investors is a complex and costly operation. It requires competent and dedicated managers. The CEO has to be an exceptional, dynamic and multilingual business executive. HE Sultan Ahmed bin Sulayem provides this leadership. He built not only a large EPZ industrial estate around a large new seaport, but also an airport-based free zone, an upgraded airline and airport. He oversees the Ports, Customs and Free Zone Corporation. Large construction projects that are under way come under his supervision.

Lack of such dynamic managers has slowed progress in several Middle East free zones, especially those in Iran, Kuwait, Syria and Yemen. However, other new free zones in the UAE, such as Ras Al Khaimah and the Hamriyah zone in Sharjah, have made spectacular progress in a short time due to their dynamic management.

The UAE zones quickly grasped the vital economic fact that, although their free zones were financed by the public sector, they had to be run as though they were private enterprises. The Jebel Ali Free Zone has been a trendsetter and a guide to other emirates in that field. Of the free zones in the UAE, six of the seven emirates have at least one and Dubai has five.

Creative force

The usual reasons for free zone start-ups are to provide infrastructure and an investment authority to attract investors. Secondary reasons are job creation, acquisition of technology and increased net export revenues.

In the UAE, labour has to be imported. Imports to Dubai usually vastly exceed exports. This is partly because 75% of activity is trading, warehousing and distribution, 3% is services and only 22% is manufacturing. Many imports are for the construction and tourist industries.

The Dubai economic pattern is unlike that in most other countries in the region because it is aimed at a mix of commerce, construction, transit trade, tourism and exporting manufacturers. In some cases where there is ample oil and gas, governments such as Bahrain, Iran, Kuwait, Saudi Arabia and Qatar look for manufacturers who require large amounts of low-cost power and have advanced technology, for example in aluminium smelting, fertilisers and other downstream exportable products.

There is a shortage of international business managers in some countries, such as Iran, Syria and Yemen, whose free zones, consequently, have not yet reached their potential. Notably, one of the more successful free zones in Egypt is privately financed and managed.

Right management

In many developing countries, public sector civil service managers cannot manage free zones very well because their clients are predominantly privately owned companies. As such, these investors demand rapid decisions and, once installed, they require services to be provided without delay. Managers trained in the public sector cannot rapidly provide the level of services needed for a successful free zone operation.

Free zone staff, even if paid by the government, have to be specially trained in public relations, given financial incentives and promoted entirely on merit.

As one result of its dynamic free zones development, Dubai has a management consultant company, Jebel Ali Free Zone International, a division of Jebel Ali Free Zone (JAFZA). Emirates, the UAE airline based in Dubai, is one of the fastest growing airlines in the world, for which local tourism and the transit routes are mainly responsible. About 150 container shipping lines call on the Dubai ports. There is a boom in construction in Dubai, mainly of hotels, but also of condominiums and business premises.

The performance of the Hamriyah and Ras Al Khaimah zones also stand out in the UAE as dynamic and both have utilised their resources successfully. The Hamriyah zone in the Sharjah emirate is exploiting its own sea and airport successfully, using its free zone to spearhead its development. The small Ras Al Khaimah emirate has a vibrant development programme and plans to launch its own airline.

Another indicator of free zone activity is the relative efficiency of the websites. Some, such as Dubai, Hamriyah, Ras Al Khaimah and Egypt, are easy to access and give updated and extensive data. Jordan has good upated information; Egypt has an excellent portal; the Hamriyah and Ras Al Khaimah free zones have clear access; and Bahrain and Qatar provide good access to their investment promotion websites.

Population factors

A major factor in free zone development in the region is population. The population of Bahrain, for example, was 724,645 in 2006, and Qatar 913,000. Lack of labour means these countries aim at investors of high net worth in the commercial or construction fields. They do not need free zones to attract investors.

Oman (with a population of 2.6 million, of which 300,000 are expatriates) gives its statistics in the form of percentages of its GDP, showing imports at 30.9% and exports at 42%. It has a growth rate of 5.1% and its inward investment programme is aimed more at commercial and know-how companies rather than favouring its small free zone.

Egypt, Iran and Turkey have populations of more than 70 million. Iraq, Saudi Arabia, Syria and Yemen have populations of more than 19 million. And Israel, Jordan and the UAE range between five and seven million. Kuwait and the Palestinian Territories have populations of between 2.5 million and 2.6 million. The smallest populations are those of Cyprus (with 835,000), Qatar and Bahrain.

Two main objectives of free zones in countries with large populations are job creation and export revenues. Investors go to populous countries for large numbers of trainable manual workers, as required in the textile/garment industries and in electronic assembly operations. Gulf free zones aim their promotions at high-technology manufacturers and service companies in insurance, warehousing, distribution and similar fields.

Ease of access to internet information is critical for investors because when industrial wage rates rise above a certain level in any free zone, investors tend to look at other sites to compare their terms and conditions. It is too expensive to visit every free zone in the region. Investors’ analysts use researchers to produce comparative tables weighing up the different incentives and other factors involved in choosing a location. Total wage rates are a critical factor.

Free zones in the Middle East differ widely, both in terms of population and financial resources. Wealthy Gulf countries’ free zone policies vary widely from those with large populations. Political stability is a vital factor in attracting FDI. Unstable countries do not attract investors.

Peter Ryan is vice-president of FEMOZA, the World Federation of Free Zones.